It is to be appreciated that any discussion of documents, devices, acts or knowledge in this specification is included to explain the context of the present invention. Further, the discussion throughout this specification comes about due to the realisation of the inventor and/or the identification of certain related art problems by the inventor. Moreover, any discussion of material such as documents, devices, acts or knowledge in this specification is included to explain the context of the invention in terms of the inventors knowledge and experience and, accordingly, any such discussion should not be taken as an admission that any of the material forms part of the prior art base or the common general knowledge in the relevant art in Australia, or elsewhere, on or before the priority date of the disclosure and claims herein.
The financial industry is an amalgam of many different financial entities and trusts that offer a wide variety of services, products and schemes. In general, the financial services industry generates revenue by providing a range of services to its customers.
One of the best known processes of the financial industry consists of borrowing from consumers (taking their deposits) at a given interest rate and then lending back to consumers (potentially the same monies in part) at a higher rate of interest, thereby generating a revenue for the financial industry. This process produces a net loss for most consumers. Only a comparatively small proportion of consumers avoid a net loss, typically by using the money borrowed from the finance industry in high risk or speculative investments.
As the financial industry has evolved, more complicated financial products have been developed, such as ‘securitisation’. Securitisation is based on aggregation of debt instruments (commonly mortgages) in a pool, which is then sold to third parties. Securitisation is popular because it enables the financial industry, including mortgage originators, to clear their balance sheets and facilitates further transactions with the consumer through continued lending (see FIG. 1). Pension and Superannuation funds have emerged as a substantial source of pooled wealth, and the financial industry has been entrusted by Governments worldwide to manage consumers' retirement funds. When securitisation is taken up by pension and Superannuation fund managers (and when Governments fund securitisation), a consumer who borrows money from the financial industry, is effectively paying the financial industry a premium to borrow their own pension or superannuation money (see FIG. 1a). Many recent innovations in mortgage and finance products incorporate an integrated securitisation feature. These include, for example, reverse mortgage products such as those offered by Bluestone Group Pty Ltd, conventional mortgages provided by, non-deposit taking lenders and equity finance mortgages as described in Australian innovation patent Nos. 2007100448, 2007100445, 2005100871, 2005100869, 2005100868, 2005100867, 2005100865, 2005100864. Sometimes securitization of shared appreciation mortgage pools involves introduction of debt into the pool in order that investor yields can be smoothed. Borrowings can be distributed as annual yield in the expectation that real investment return on the underlying mortgage investments at a future date will repay the principal and cost of the debt.
In response to consumer and Government demand for innovation in the financial industry to improve the affordability of housing, a number of shared equity or equity finance products have arisen. These products attempt to better align the financial industry's revenue generation systems and models more closely with consumer interests.
Since 1996 in the UK Shared Appreciation Mortgages (SAMs) have been offered to consumers by Barclays and the Royal Bank of Scotland. SAMs involve a lender advancing a defined sum of money at settlement in return for a percentage share of the future capital appreciation of the real property asset over which it is secured. The nature of a SAM, whereby a defined value is lent, yet the repayment can continue to grow exponentially, has resulted in a class action against HBOS and Barclays.
Various SAM and equity release schemes have also operated in the United States. U.S. Pat. No. 5,983,206 relates to a system for creating single mortgages with multiple obligations which allow for financing through a combination of mortgage debt and equity participation in the underlying property value. The US Department of Housing and Urban development also administers Home Equity Conversion Mortgages that are a type of Reverse mortgage available to those 62 years of age and above.
In Australia shared appreciation mortgages, also known as “collateral-dependent mortgage” or “equity finance mortgage” exist for lending money to entities on a variety of ratio bases (e.g. 1/2/1). If a lender advances 20% of an asset's value to fund the borrowers purchase, no interest accrues on the loan amount for as long as it remains outstanding (except in the event of default), in return for 40% of any appreciation of the asset. At the same time, the lender provides an “Insurance service” by sharing in 20% of depreciation of the asset's value.
All financial industry lending products available follow the basic principal of advancing a sum of money (principal), or quantum of credit, under a loan contract which requires the money to be repaid in addition to (i) interest payments throughout the term, or (ii), payment of ‘interests worth’ (in the case of asset depreciation, a deduction) upon redemption of the mortgage loan, typically calculated using either a compounding interest rate or using a ratio of asset appreciation, or both.
Prior art products are also based on an agreement between a financial industry participant and consumer, that is, a person not in the finance industry. They are not suitable for consumer to consumer arrangements. Specifically, those in the business of making loans available by advancing a principal amount in return for a share of capital appreciation in an underlying asset, benefit from a free leverage. For example, a lender who advances twenty percent of a $500,000 asset has the benefit of free leverage, obtaining an agreed proportion of the total asset appreciation, without having to fund any part of the remaining $400,000 with debt. By contrast, consumers wishing to obtain access to the same leveraged returns may need to invest twenty percent of the asset value (i.e. $100,000.00) and subsequently fund the $400,000.00 difference with debt (interest bearing or otherwise) in order to secure the rights to capital appreciation over the $500,000.00 asset. The prior art systems teach away from the provision of free leverage to consumers.
In the UK and Europe schemes that join counterparties for pseudo retirement saving (investment) and retirement income purposes do exist, and they have prompted ethical questions, extensive debate and a number of court cases in the UK. As an example, a typical home reversion involves a percentage transfer in ownership of a senior citizens' property asset in exchange for a one time payment and a life tenancy. The payment value, as a percentage of the current asset value, is always less than the percentage of ownership exchanged. The difference between the payment value and the current value of ownership transferred allegedly takes into account the value of the life tenancy and the life expectancy of the senior citizen using a calculation based on the value of the property at the time of the agreement. Upon the death of the senior citizen, the property is sold and the investor receives their full payout based upon the value of the property at the sale date and a percentage share of the property set out in the agreement.
Consumers have generally been constrained to dealing with the financial industry if they wish to obtain long term mortgage credit or to generate an income by trading currently held assets or equity. Furthermore, consumers have been constrained by lending practices that are based on a predetermined maximum value of principal and/or predetermined maximum term. There is therefore a need for consumers to have access to more flexible loans comprising an ongoing principal having an ongoing value combined with no preset maximum term.
Some prior art methods (patent applications) describe an investor or investors paying ongoing sums of money to an asset owner (borrower) in exchange for a share of asset appreciation in the asset over which the loan is secured or in which the investor is granted a share of ownership. Each of these methods provide their, own method of calculating a value for their respective ongoing payments and term over which it is paid (if a term is applicable) but no prior art method has the systems which enable an investor, or system custodian, to firstly select an investor's desired return for a given asset appreciation rate and subsequently calculate the ongoing payment value, whether or not it is subsequently indexed, that will achieve this return. Concomitantly, none of the prior art systems are capable of calculating or administering agreements based upon appreciation share that also incorporate the cumulative value of ongoing payments made to the asset owner as part of the redemption value calculation, so as to not result in significant losses for investors or extreme cost of finance for borrowers under economic conditions which deviate from average. Such an example is US Patent application with Publication Number US20100145877A1, which presents a method for enabling an investor to invest in a real estate asset in exchange for periodic payments to the owner of the real estate asset. The method for calculating the value of periodic payments involves multiplying the asset value by an appreciation share percentage and the resultant value by an arbitrarily selected percentage rate; the resultant value becomes the periodic payment amount. The method for calculating the amount repayable to the lender at the end of the agreement is a mere product of the agreed appreciation share and asset value at that time, with no reference to the cumulative value of ongoing payments made. Accordingly, these prior art systems do not present an effective method for lending periodic payments to an asset owner in exchange for a share of asset appreciation, as where economic conditions vary from expected norms, significant losses for the investor or very high cost of borrowing for the asset owner will be the result.